TMI Blog2001 (2) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... ary for the purpose of this case), except noting that the right to transfer the shares is not absolute under the articles of association. Further article 13 reads as follows : "If in any case the Proposing Transferor, after having become bound as aforesaid, makes default in transferring the share the Company may receive the purchase money, and the Proposing Transferor shall be deemed to have appointed any one Director as his agent to execute a transfer of the share to the Purchasing Member or person selected as aforesaid, and upon the execution of such transfer the Company shall hold the purchase money in trust for the Proposing Transferor. The receipt of the Company for the purchase-money shall be a good discharge to the purchasing Member or person selected as aforesaid and after his name has been entered in the register in purported exercise of the above power the validity of the proceedings shall not be questioned by any person." 4. On 30-10-1999, in an Extraordinary General Meeting of the company held at the registered office of the appellant company, the articles of association of the company were resolved to be amended; thereby the original article 16 of the company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Director of the Company to act as your agent and execute the transfer deed for the shares being held by you in favour of Sri M. Ramachandra Rao, the Purchaser at the rate of Rs. 668 per share as decided by the Board which is the book value per each share. In pursuance of that the transfer deed is executed by Sri B. Sreemannarayana and the transfer of the shares is effected in the Company records in favour of Sri M. Ramachandra Rao. The total value of the shares of Rs. 2,33,800 was received by the company from Sri M. Ramachandra Rao and the same is herewith sent to you by way of a demand draft drawn on State Bank of India, Peddapuram bearing No. 797999 for Rs. 2,33,800 (including bank commission) dated 9-2-2000. We therefore request you to acknowledge the same immediately and further request you to surrender the share certificates." 6. In the explanatory statement as required under section 173(2) of the Act appended to the notice of the Extraordinary General Meeting held on 30-11-1999 wherein the decision to cancel the membership of the first respondent was taken, reads as follows : "1. The Company was formed by a group of close relatives in the spirit of Partnership. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 5. She is repeatedly raising trivial issues and loudly protesting about the insignificant matters and requesting for all inconsequential information and details on regular basis, thereby distracting and diverting the attention, time and effort of the management away from the more important business activity of the Company thereby causing loss to your Company in terms of money, time and effort. 6. In the Company s general meeting Mr. Narasimha Rao who has attended as the proxy of Mrs. Bharati Rao has raised frivolous and unconnected matters merely to disrupt the proceedings and hinder the Company s work. This behaviour is in violation of the section 176 of the Companies Act. 7. The affairs of your Company which is a closely held one are being given bad publicity by her to outsiders who have no connections whatsoever with the Company. The management and the Company have patiently endured all the troubles/problems and obstructions created by Mrs. Bharati Rao for the past few years in the hope that she would change and act as a responsible shareholder in the interest of the Company. However the things are getting worse. Hence the above Resolution." 7. Aggrieved by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of association is illegal - for the reasons that the first respondent s right to hold the shares is interfered with without any authority of law and assuming that the amendment such as the one made in the present case could be made by the company, such amendments were made behind the back of the first respondent, i.e., without any notice to the first respondent and therefore the amendments do not bind the first respondent. 10. I must clear up one factual issue before I proceed to examine the questions of law. Though the question, that the amendments to the articles of association were made without a proper notice to the respondent, was raised before the CLB, the CLB did not record any finding on the same and I do not find any material on record to come to any conclusion on the question whether such a notice was given to the first respondent or not. 11. The Supreme Court in Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. [1971] 41 Comp. Cas. 51 held as follows : ". . . Subject to the provisions of the Companies Act, a company and its members were bound by the provisions contained in the articles of association. The articles regulated the internal m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholder . . . . it is conceded and in fact it could not be contended otherwise, that such a power might be resorted in the articles of association as originally framed". (p. 169) 16. In a separate but concurring judgment Lord Warrington, J. observed : ". . . that such a provision if inserted in the original articles would be valid follows from the decision in Phillips v. Mfrs. Securities Ltd. 116 LT 290." 17. Similarly, in Naresh Chandra Sanyal s case ( supra ) the Supreme Court held valid a condition of the articles of association of the Calcutta Stock Exchange Association, which provided for the forfeiture of the shares of one of the members of the stock exchange on the ground that the member failed to carry out his engagement. Their Lordships justified the existence of such a clause on the ground that the articles of association are in the nature of a contract and the forfeiture of the shares is in the nature of a penalty authorised under section 74 of the Contracts Act. 18. At this juncture, the decision of the Madras High Court in Madhava Ramachandra Kamath v. Canara Banking Corpn. Ltd. [1941] 11 Comp. Cas. 78 requires an examination as it was heavily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficate is in existence, along with the letter of allotment of the shares or debentures:" 20. Therefore, the language of section 34(3) on the basis of which the above-mentioned judgment of the Madras High Court was rendered is different from the language of section 108. Section 108 recognises that a transfer deed could be executed either by the transferor or on behalf of the transferor. In fact, the Madras High Court in the above mentioned decision recognised exceptions to the rule contained under section 34(3) of the Indian Companies Act, 1913. The learned Judge dealt with the exceptions in the following words : "There are of course occasions when the transferor does not or cannot sign, such as when a Court sale has been held. In that event Order 21, Rule 80, of the Code of Civil Procedure provides for the Judge or an Officer of Court directed by him signing the transfer instrument." 21. Therefore the requirement that only the transferor should execute the instrument of transfer is not absolute. More particularly in view of the language of section 108, which is already noticed. Such an execution could be on behalf of the transferor if it is authorised either by the transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be that the alteration must not be such as to sacrifice the interests of the minority to those of a majority without any reasonable prospect of advantage to the company as a whole . . . .". In my view, the same test applies in deciding whether in a given case the power was bona fide exercise or not. Applying this test, I do not find any material on record to hold that the decision of the first appellant to expel the first respondent shareholder, is with any reasonable prospect of advantage to the company as a whole nor is it established that all the activity of the first respondent and her husband in sending up various complaints resulted in any tangible damage to the company. In fact, by sending out the first respondent by cancelling her membership, there is no assurance that the first respondent or her husband would be stopped from sending the complaints against the company. In the circumstances, I am of the opinion that the action of the appellants herein in cancelling the membership of the first respondent will achieve no benefit or advantage to the company as a whole; consequentially, the same must be held to be illegal. 24. For all the above mentioned reasons, I do n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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